The tariffs pushed U.S. prices higher, because the foreign steel on which tariffs were imposed stopped coming in, restricting supply. This shortfall -- more than U.S. producers could quickly make up -- caused U.S. prices to leap. The U.S. price for hot-rolled steel, a basic item that bears a 30% tariff, has jumped to around $350 a ton from $210 late last year. Because it usually isn't possible to substitute anything else for steel, at least not on short notice, the higher prices didn't damp demand.

In Paris this week, as in the past, delegates from outside the U.S. argued that high-cost producers should be expected to close. Many of these are in the U.S. But U.S. and a few other steelmaking countries counter that, when all factors are considered, the U.S. plants aren't the problem. They say some low-cost producers, including those in Russia and Eastern Europe, are low-cost only because they are permitted to pollute more heavily.

Not all of the U.S. steel industry's problems are made abroad. No more than about 30% of U.S. steel consumption last year was accounted for by imports. Another big problem for old-line companies is the rise of U.S. minimills, which make steel from melted scrap instead of from scratch. Minimills such as Nucor Corp. are far more competitive than the industry's former giants, not only because melting scrap is cheaper but also because minimills are generally nonunion.

Copyright Dow Jones & Company Inc Sep 13, 2002

Nels Leutwiler has often voted Republican. Then this March President Bush imposed sweeping tariffs on steel imports. When the GOP hit him up last month for a $1,000 contribution, the chief of Parkview Metal Products Inc., an auto-parts maker, sent a note instead.

"I don't have any money to contribute because of the exorbitant cost of steel as a result of the Bush tariffs," he wrote. He says the tariffs added more than $200,000 in costs per month for his company, which is based in Chicago and has factories in Illinois, New Mexico, Texas and Mexico.

Mr. Bush's tariffs were key to his campaign to end the international steel wars. The administration hoped they would give U.S. steelmakers time to modernize, bolster Republican candidates in vote-rich patches of the heartland, and give the U.S. a club to use in continuing efforts to cut global steel overcapacity and curtail foreign steel subsidies.

Six months later, the gambit has backfired on nearly every front.

Steel prices are up more sharply than Bush advisers anticipated. Lured by the higher prices, mills around the world are producing more steel today than they were two years ago, worsening the global glut. Brazil produced 36% more steel in July than in July 2001. Production in Russia, the EU and Japan is up about 3% in a year.

U.S. trade partners are angrier than Mr. Bush's foreign policy advisers expected. And users of steel are more vociferous than his business advisers anticipated, prompting the administration to carve exceptions to the tariffs. These, in turn, have angered the steel-state legislators and union members whom Mr. Bush's political advisers were courting.

The Bush strategy's shortcomings were painfully evident yesterday in Paris, where officials of 39 steel-producing countries proved once again unable to find a way to do what all agree is needed: Close some mills somewhere. There simply is no consensus on what constitutes the "inefficient steel capacity" that they generally agree should be shuttered, said T.H. Chen, vice president of China Steel Corp. Each country thinks another nation should be the one to close a mill.

Although most participants were too diplomatic to criticize the U.S., a few said what was clearly on many minds. "Mr. Bush has been hypocritical," said D. Singh, joint secretary for India's ministry of steel. "It is difficult to explain or understand how one argues for free markets and have safeguards at the same time."

Continued consultation remains important to the government officials, lawyers and steel-industry executives who gather periodically to ponder the steel glut. They agreed to meet again in December.

The tariffs Mr. Bush imposed range from 8% to 30% on a wide range of products and are supposed to phase out by March 2005. Bush aides call them a legitimate way to help a troubled domestic industry that's suffering because foreign governments subsidize their steelmakers. The administration also defends the tariffs as a way to buy U.S. steelmakers time to become more efficient and competitive -- the same arguments that presidents since Lyndon Johnson have made when they moved to limit steel imports. The Bush aides say six months isn't long enough to judge the strategy's success.

Had Mr. Bush not imposed tariffs, the aides also argue, Congress might have passed even more stringent remedies. They say Mr. Bush had to prove himself a tough enforcer of trade laws to win support for goals such as broad free-trade pacts.

"We live in a world that isn't always about living on a free-trade basis," says Grant Aldonas, undersecretary for international trade at the Commerce Department. "It's about moving the process in the right direction. And I truly believe that this action has done that."

The administration has scored one victory since March, persuading Congress to give Mr. Bush authority -- denied to Bill Clinton -- to negotiate new trade agreements that Congress can only approve or reject, not amend. But even that triumph is clouded, Washington trade analysts say, because the steel tariffs have ignited foreign protectionism in agriculture and textiles that is endangering the larger free-trade ambitions. "With steel, Bush unleashed the hounds, and he may not be able to put them back," says Gary Hufbauer of the Institute of International Economics, a Washington think tank.

Meanwhile, the domestic political payoff from the tariffs isn't apparent. The price rises have drawn the wrath of U.S. manufacturers, who represent a bigger slice of the economy than steelmakers. Over three decades, federal efforts to protect steelmakers from imports have cost steel users $120 billion, Mr. Hufbauer calculated in a study he did last year.

Steel consumers used to be a disparate group with little might in Washington. But in the past six months, they've hired public-relations firms, staged protests and offered Mr. Bush tales of financial hardship. These led the administration to carve exceptions to the tariffs. As a result, about 25% of the 13 million tons of imports originally hit by the duties now are exempt. Executives of auto-industry suppliers, particularly hard hit by tariffs, plan to descend on Washington Oct. 1 to pressure the administration to end the tariffs.

The exclusions are depleting the goodwill Mr. Bush initially won from steelworkers. In March, the rank-and-file were clamoring to invite the president and cabinet members to visit mills, says United Steelworkers President Leo Gerard. Now, he says, the line he hears most from workers is, "Hey, I thought these guys were on our side." He adds, "Many of our members even talk of betrayal."

The tariffs pushed U.S. prices higher, because the foreign steel on which tariffs were imposed stopped coming in, restricting supply. This shortfall -- more than U.S. producers could quickly make up -- caused U.S. prices to leap. The U.S. price for hot-rolled steel, a basic item that bears a 30% tariff, has jumped to around $350 a ton from $210 late last year. Because it usually isn't possible to substitute anything else for steel, at least not on short notice, the higher prices didn't damp demand.

The U.S tariffs left foreign producers with steel they had to sell elsewhere. Foreign countries, fearing this steel would flood into their markets, imposed import restrictions of their own. Those caused steel prices to rise for these countries' own producers, just as prices had risen for U.S. producers. These higher prices spurred more production, worsening the glut.

Meanwhile, the higher U.S. prices still haven't produced profits for most of the old-line American steel companies. Bethlehem Steel Corp. and National Steel Corp., for instance, are still losing money, and that limits their financial ability to modernize and get more efficient.

Giant U.S. Steel Corp. does expect to be profitable this year, however -- for the first time since 1999. Its chief executive, Thomas Usher, likens the tariffs to a belated tourniquet: "For those who still have some blood left, this will help. For those who don't, it's another story."

In discussions with Commerce Secretary Donald Evans and other U.S. officials, steel chiefs say their strengthened companies now are making plans to consolidate and recruit new outside investors, moves they say would be impossible if not for the tariffs. But so far, the tariff wall appears to have been discouraging sorely needed consolidation, by giving the weakest players just enough maneuvering room so they can resist takeover pressure.

Meanwhile, the higher prices the tariffs have caused on many key steel products are coaxing more capacity on line. Shuttered mills such as Acme Metals Inc., Trico Steel Co. and Qualitech Steel SBQ LLC are slated to resume operations this year, and weak mills such as Bethlehem are more likely to hang on. The same thing is happening abroad.

In Paris this week, as in the past, delegates from outside the U.S. argued that high-cost producers should be expected to close. Many of these are in the U.S. But U.S. and a few other steelmaking countries counter that, when all factors are considered, the U.S. plants aren't the problem. They say some low-cost producers, including those in Russia and Eastern Europe, are low-cost only because they are permitted to pollute more heavily.

Some struggling national economies see steel as vital. Bulgaria's chief of industry policy, Andrey Breshkov, says steel jobs are critical to his country, where the unemployment rate is 20%. Bulgaria's three major steel companies export 80% of their production, mainly to the European Union.

Today in Paris, the steel-making countries are to grapple with how to end steel subsidies, a step all agree ought to be taken. The controversy involves defining the term. Subsidies can mean tax breaks or loans from a government. Or they could mean governments' past decisions to relieve steelmakers of costs -- such as retiree health bills -- they otherwise have to bear.

One thing that seems to unite foreign steelmakers is dismay about the Bush tariffs. It has far exceeded the muted response to Ronald Reagan's steel-protection measures in the early 1980s. One reason is that his "voluntary restraint agreements" were less onerous. Another is that national economies are more interconnected now. Nearly a dozen nations have filed actions against the U.S. at the World Trade Organization, arguing that the Bush decision violates WTO rules.

Bush aides say they were surprised at the uproar, but pronounce it more bark than bite. The tariffs have acted as a sort of catalyst by making countries realize that only by cutting production and ending subsidies will the world avoid similar upheaval, Mr. Aldonas contends.

Bush administration officials in Paris say much hard work remains to convince other countries that the U.S. tariffs and global capacity cuts aren't contradictory. They've expressed relief that there's still some consensus that world-wide capacity needs to shrink somehow.

But not all of the U.S. steel industry's problems are made abroad. No more than about 30% of U.S. steel consumption last year was accounted for by imports. Another big problem for old-line companies is the rise of U.S. minimills, which make steel from melted scrap instead of from scratch. Minimills such as Nucor Corp. are far more competitive than the industry's former giants, not only because melting scrap is cheaper but also because minimills are generally nonunion.

The beleaguered industry isn't likely to see much consolidation until it resolves the issue of "legacy costs" -- the $13 billion promised to retirees by union contracts in the past. Big steel companies resist taking over a weak player because doing so means absorbing its legacy costs, too. Many executives say consolidation won't proceed unless the U.S. assumes some of these costs, a move Congress has so far resisted.

So the industry appears doomed to the peak-and-valley cycle that has plagued it for decades. Prices are up now but could ease if production continues to increase. "What we could see is another pricing death-spiral that would bring more pain and suffering," says Peter Marcus, managing partner of World Steel Dynamics, a consulting firm.

The only long-term hope, he says, is for the industry to develop an ironclad early-warning system. Then, when demand begins to slip, mills around the world would scale back production in unison. "And the chance for that happening," he adds, "is about nil."

---

                     Steel Barriers 

  More than 30 years of presidential aid to the steel industry 

  -- 1968 Johnson imposes "voluntary" restraints on imports of steel 

from Japan, Europe 

  -- 1977 Carter approves minimum price for steel imports 

  -- 1984 Reagan imposes "voluntary" restraints on major Asian and 

European steel producers 

  -- 1989 Bush extends restraints, launches global effort to cut 

government subsidies 

  -- 1994 Clinton allows voluntary restraints to lapse 

  -- 2002 George W. Bush imposes three-year tariffs on wide range of 

steel imports

(See related letter: "Letters to the Editor: Steel Tariffs Are Part Of Long-Term Strategy" -- WSJ Sept. 25, 2002)